In this article, Varsha Jhavar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on rescission of contracts.
What is a contract?
A contract is an agreement having specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. The contract law is at the heart of most commercial or business dealings, therefore, it is one of the most significant areas of law and can involve significant variations in circumstances and complexities. The existence of a contract requires finding the following seven factual elements:
- an offer;
- an acceptance of that offer;
- a promise to perform;
- a consideration (a payment in some form);
- a time or event when performance must be made (meet commitments);
- terms and conditions for performance;
To define contract in simple terms– a contract is an agreement between private parties creating mutual obligations enforceable by law.
The Indian Contract Act, 1872 prescribes the law relating to contracts in India. The Act was passed by British India and is based on the principles of English Common Law. It is applicable to all the states of India except the state of Jammu and Kashmir. It determines the circumstances in which promises made by the parties to a contract shall be legally binding and the enforcement of these rights and duties. The Act as enacted originally had 266 Sections and had a wide scope.
A contract may be brought to an end by several ways
- By agreement – where parties agree to end the contract before completion of work (discharge by agreement)
- Due to Force Majeure – If the contract allows for termination in the event of force majeure or for such reason as an act of God. Force Majeure is a contractual term by which either of the parties has the right to cancel the contract or can be recused from the performance of the contract
- Due to breach – Where one party has not complied with term/s or condition/s of the contract, entitling the other party to terminate the contract
- By rescission – If there is misrepresentation by a party, the other party gets entitled to terminate the contract. Rescission can be legally defined as- The abrogation of a contract, effective from its inception, thereby restoring the parties to the positions they would have occupied if no contract had ever been formed.
- By frustration – Where the contract cannot continue due to some unforeseen circumstances. The frustration of Contract happens when a contract becomes impossible of performance, on account of circumstances beyond the control of parties. In India, Section 56 of the Contracts Act deals with the doctrine of Frustration. An event, such as a change in a particular law, which leads to illegality or impossibility of performance of a contract, is a circumstance that justifies in the contract getting frustrated. Section 56, however, has a provision for payment of compensation for loss of non-performance. If a promisor knew or could have known with reasonable diligence had known that the act which was promised was impossible & the same was not known to the promisee, in such a scenario the promisor can be held liable (for its non-performance) to compensate for loss to the promisor.
Rescission of a contract
If a contract is not proving to be beneficial depending on the situation, one has the option to rescind the contract. The word “rescission” is derived from the Latin term rescindere, which means to cut or tear open. The right of rescission is available under Section 19 of the Indian Contract Act.
The option of Rescission is available to a party as a remedy whose consent, whilst entering the contract, has been invalidated due to following:
- Misrepresentation / false statement of fact made by the other party whilst execution of the contract
- A party is mistaken in the terms of the contract and the other party was aware of the mistake
- A party was unduly influenced by another to enter into the contract (which is considered under Section 19A of the Act).
- Non-disclosure with respect to insurance contracts
The above could be the main grounds for rescission of the contract. A party to a contract is entitled to rescind the contract in the circumstances given in Sections 39, 53, 55, 64 & 65 of the Indian Contracts Act.
- Section 39: Applies for Contracts where the performance period or time has not yet arrived
- Section 53: Applies to the liability of party preventing an event, thereby affecting the performance or the fulfilment of the contract
- Section 55: Applies where the party, who has promised to do a certain thing at a specified time, fails to do it on or before time
- Section 64: Applies for a voidable contract
- Section 65: Deals with the principle of restitution in integrum (a Latin term). Meaning restoration to original condition i.e. in situations where the benefit is received and the contract was later found to be void. It is ‘compensatory in principle’ and prevents ‘unjust enrichment’
A party would be unable to go for rescission if it does not restore the other party to the pre-contractual position. If rescinding party has received a benefit, it will not be able to rescind unless and until the benefit is returned to the other party. Also if the reason for rescission is to negate a third party’s rights, rescission cannot be available.
Rescission of a contract by agreement
Where the parties may agree to the total release of their obligations under the contract or may enter a new contract having different obligations or parties. There could be a partial discharge by way of variation/waiver in terms or obligations of the existing contract.
Rescission of agreement can either be express or implied. It is implied wherein there is an alteration of prevailing terms and substituted by new terms. Or there can be novation i.e. the substitution of a new contract in place of old one.
There can be contractual termination, if the contract expressly provides an option for either of the parties to terminate the contract. This can happen if there is a breach of contract, or occurrence / nonoccurrence of a specified event other than the breach.
After facts come to notice, right to rescind must be exercised immediately or in a reasonable time frame. Circumstances of a case will define the reasonable time frame. Norm that rescission has to be immediate does not hold good if there is a tenable reason for the delay. The rescission must be communicated in the same manner as a proposal .
Section 75 of the Act applies to compensation in case of rescission in a contract. It prescribes compensation in case of rightfully rescinded contract. The section reads as follows:
“Section 75. Party rightfully rescinding the contract, entitled to compensation- A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.”
This section entitles such a party to claim compensation for the damage sustained by him or her because the contract has not been fulfilled. The claim for compensation under Section 75 is maintainable when the right of repudiation of the contract has been exercised under Sections 39, 53, 54 or 55 of the Act. This section fairly covers the right of a buyer who has paid a deposit on sale to recover it back if the seller makes default if any more specific authority is wanted then the remedy is available by way of breach of contract under the general provisions of Section 73.
Steps for Recession
Basically, a notice is presented by the aggrieved party, addressed to the opposite party stating the reasons for recession. In that notice, the party declares its intention to rescind the contract and also asks that money be refunded or compensation be paid. The notice results in unilateral rescission.
Sections 27 to 30 of Specific Relief Act, 1963 deal with the rescission of a contract. It is a type of legal redressal.
- Section 27 deals with a situation where the rescission may be adjudged or refused,
- Section 28 deals with rescission in cases of contracts for the sale or lease of immovable property,
- Section 29 deals with an alternative prayer for rescission and
- Section 30 the court may require the rescinding party to do equity.
In a valid contract between two or more persons, when there is misrepresentation by a party, the other party is legally entitled to have it terminated. A contract may be rescinded either by release or by agreement. Certain provisions of Specific Relief Act, 1963 provide a mode of judicial redressal for the aggrieved party against the opposite party. Rescission is fundamentally a method of undoing the injustice done to a party.
 Ram Nagina Singh v. Governor General in Council, AIR 1952 Cal 306